The latest financial nightmare for New York is the announcement that the 2005 to 2009 MTA Capital Plan is already $1.4 billion over budget, and that long promised improvements may have to be scaled back or deferred (perhaps indefinitely) as a result. MTA capital improvements always cost an ungodly amount of money, and getting those structurally high cost down is one of the most important tasks the agency faces. I actually worked on the capital budget for New York City Transit for about three years, and went there hoping to find out why costs were so high. But I didn’t come up with any dramatic insights. Hopefully Elliot G. Sander, the new Executive Director and Chief Executive Officer, will do better. Given his prior job, he has the expertise. The recent rise in construction costs, however, is not structural, it is cyclical – a product of the booming economy in general and a high level of construction in particular. Rather than pay more for less work, I believe the MTA should simply wait until development slows down and the construction industry is willing to meet its price.
It may not have to wait long. In my current role as a real estate researcher, I read dozens of articles for around the country every day. And I know that construction costs have soared as private-sector development has reached a cyclical peak and places like China and India have boomed, driving up the cost of construction materials and labor – when labor is even available. It isn’t just the MTA which has been going over budget or facing high bids. Developers of apartment buildings, office buildings and industrial buildings have faced the same cost explosion. It has been a growing issue for two years.
But the tide is turning. In a boom year for housing, 2 million housing units are built, but in a bad year just 1 million new units are constructed. Well 2006 was a big year for construction, with more than 2 million new units added, but only 1 million of those were sold. Developers are dumping land they can no longer afford to build on. Building permits have fallen, and some units with permits may never be built. The price of wallboard, copper and other materials has crashed from extreme heights. Home Depot sales are down, and lumberyards are laying people off. In some parts of the country, construction companies are, for the first time in years, returning the phone calls of homeowners who just need a bathroom rehabbed. They are grateful for the work.
None of this has reached New York City, where the for-sale housing bubble has yet to deflate and a long term shortage of hotel rooms and office space is prompting a commercial development boom. But it will. And if the MTA accepts bids based on today’s inflated costs, it will merely provide a windfall to the contractors if their costs fall.
The MTA isn’t doing anybody any favors by trying to get them to work when they are already swamped. It won’t get any favors in return. It would get a better deal when construction workers, and those who produce construction materials, really needed the work. The agency should let the TBMs (tunnel boring machines) crunch – that work really doesn’t conflict with anything else. But rather than bid other projects over a fixed time period, and take the lowest bid that comes in no matter how high it is, Mr. Sander should just decide what the projects should cost, and leave the bids open until a responsible bidder meets the price. Later this year. Next year. Or the year after. We’d all get a break from diversions. And when construction geared up again because costs had fallen, if a surge of construction activity taxed the MTA engineering staff, laid off construction superintendents from the private sector can be hired to help out for a while. In any event, the dollar will go further in a bust.
In case you are wondering, I’m taking my own advice. Our house could use some work, but we are waiting for a bust to have it done. It will be more affordable for us then, and we might get a contractor who will push a job through from start to end rather than juggling three or four jobs and delaying them all. It worked for me in the mid-1990s, and it could work for the MTA now.